Noncompetes A Tale of Two Companies

It was the best of contracts, it was the worst of contracts, it was the epoch of prosperity, it was the epoch of lost sales and despair. One company required its employees to sign well-crafted non-compete agreements, the other did not; one company’s business is thriving, the other company’s business is collapsing. Whether you protect your company’s goodwill and valuable business information can be the difference between the success and ruin of your company-particularly in this time when so much intellectual property can be copied onto a computer disk without anyone discovering the theft until it is too late.

Noncompetition agreements (a.ka. “noncompetes”) are contracts that prohibit departing employees from working in a competing business in a particular geographic area for a specified amount of time. They do not, by themselves, alter the nature of the employment relationship, which, unless otherwise agreed or required by law, is “at will” (meaning that the employee can be fired for any reason or for no reason at all, so long as the basis for such termination does not violate public policy).

Noncompetes Must Be Reasonable To Be Enforceable.
The purpose of noncompetition agreements is to protect legitimate business interests, i.e., a company’s trade secrets, confidential business information and goodwill. Such interests, however, must be balanced against, and accommodate, the employee’s right to earn a living. Thus, noncompetes cannot be used simply to block ordinary competition or to prevent the former employee from using the knowledge, skill or experience gained on the job.

To achieve this balance of interests, noncompetes will be enforced only to the extent that they are reasonable, which varies depending upon the circumstances. Whether the noncompete is reasonable will depend on, among other things, the nature of the company’s business and the position held by the employee. The analysis of reasonableness focuses on the scope of the restrictions, the geographic limitations on future employment and the duration of the prohibitions. Accordingly, each of these three aspects of the agreement should be as narrowly-tailored as possible, while providing meaningful and adequate protection for the company. Significantly, with many companies now conducting their business over the Internet, the geographic limitations applicable to those companies have become less of a factor, with the analysis focusing more closely on the scope and duration of the restrictions.

Regardless of the ultimate proscriptions imposed, the company should consider including several additional provisions to make the document more reasonable on its face. Specifically, the company should consider: (1) identifying the company’s interests to be protected; (2) including an acknowledgement by the employee that the company will suffer irreparable harm requiring injunctive relief if the agreement is violated; and (3) providing the employee with the option of obtaining the company’s acknowledgement that the would-be employer is not a competitor within the meaning of the agreement. To provide an additional level of protection, the agreement should include a clause that, if any portion of the noncompete is found to be unreasonable or not enforceable, the remainder of the agreement should be enforced to the fullest extent permitted by law.

To the extent that the company might desire greater protections than traditionally permitted, it should consider including an “option” to “purchase” additional restrictions. For example, although the duration of a typical noncompete (i.e., noncompetes that do not arise out of the sale of a business or similar transactions) is one to two years after departure, the company can include a clause permitting it to extend the duration for an additional specified period upon the payment of some agreed-upon compensation.

Increase Your Odds With Conduct.
Even if you have drafted the most reasonable and well-crafted noncompete, a court still might not enforce it if your conduct has not been consistent with a need for the protections. For example, if you are going to claim that your information is confidential, you had better have taken adequate precautions to safeguard the material from people who did not “need” to see it. Similarly, by failing to uniformly require a noncompete agreement from similarly-situated employees, and permitting some former employees to violate their noncompetition agreements, you substantially decrease the odds that a particular employee’s noncompete will be enforced, as you have, in the eyes of the court, not adequately sought to protect the information yourself. This is not to say that all employees must sign noncompetes or that noncompetes must always be enforced; rather, each of these issues depends on the particular circumstances involved.

You can also increase your chances of enforcement by reminding all departing employees who have executed a noncompetition agreement of the existence and terms of the noncompete and having them acknowledge that you have done so. Also ask them to disclose the name of their new employer and to affirm that they have no intention of competing and that they have not taken with them (at any time) anything belonging to the company. Likewise, have all new employees sign a written acknowledgement that, by working for your company, they are not violating a noncompetition agreement with a prior employer.

There Is No Adequate Substitute For A Properly-Crafted Noncompete.
In the absence of a noncompete agreement, former employees are basically free to compete against their former employer. While federal law, and many states’ laws, prohibit former employees from stealing or using trade secrets belonging to their former employer, they frequently cannot be enforced without government involvement and, more significantly, require proof that the employee has taken the company’s trade secrets.